The Big Tech layoffs are a turning point
Google, Amazon, etc. will still be big, but they won't be an automatic career exit.
The end of the Second Tech Boom has played out in stages. First there was the big crash in tech stocks in the first half of 2022. Lower stock valuations caused VCs to pull back on startup funding. They also caused tech workers — much of whose pay comes in the form of shares — to take a big retroactive pay cut. Then later in the year, crypto imploded, which seemed to confirm that this was a general tech bust instead of a speed bump.
Now the latest shoe has dropped. Three big tech companies have now engaged in a massive wave of layoffs — 12,000 at Google, 10,000 at Microsoft, and a whopping 18,000 at Amazon. The first two of these are especially dismaying, because Google and Microsoft’s stock prices had managed to avoid the worst of the carnage in 2022 — previous big layoffs had come at companies like Meta and Salesforce, whose valuations had taken larger hits. If even the relatively healthy companies are being forced to make deep workforce cuts, it bodes ill for the entire sector. (The one big tech company that has avoided major layoffs so far is Apple, whose platform dominance and brand value have apparently allowed it to sail above the fray.)
This second wave of layoffs — which may not be over yet — is already bigger than the waves last fall and last summer:
Most of these job losses have been concentrated in San Francisco and Seattle.
I’m not sure that these layoffs tell us much more about the future of the tech industry than we already knew. But they probably do tell us something about the future of the tech job market. Over the past decade, compensation at the big tech companies — often called FAANG, even though that acronym doesn’t really apply anymore — soared to pretty incredible heights. And because these companies employed massive numbers of people and seemed to be always hiring, those high-paying jobs there weren’t nearly as hard to land as in, say, the quant finance industry. They also probably seemed pretty secure — when a company just grows and grows, you don’t see a lot of layoffs happening around you, so you don’t spend a lot of time thinking about the danger to your own job.
In other words, for a whole generation of elite knowledge workers, FAANG provided the ultimate career exit strategy. If your startup failed or you didn’t like academia or you were just looking for a second act in life and were decently good with numbers, Big Tech was there waiting for you with an offer that would land you a nice house in a fancy coastal city, a bunch of brilliant and friendly co-workers, and a comfortable retirement.
I don’t want to be too apocalyptic and say “This is all gone now, no more FAANG gravy train”, because that’s just not true. The layoffs are a small percent of these companies’ workforces, and that will still be true even if there are one or two more rounds. Apple, Microsoft, Google and Amazon still sit at the top of the list of America’s most valuable companies, and there are lots of medium-big tech companies too, and those are still going to try to pay competitive salaries. Big Tech is very, very far from dead.
At the same time, though, I do think some important things have changed now, in ways that will hurt some workers, but which ultimately could benefit the tech ecosystem at large. To understand why, we first need to think about why the FAANG companies played such an important role in the first place.
The Second Tech Boom was a Big Tech boom
Startups tend to get a lot of attention in the tech world, and for good reason — they represent massive upside opportunity, for their investors, their founders, their employees, and for the economy. Today’s scrappy little startup might be tomorrow’s Amazon or Google. But in the 2010s, the most successful startups tended to get acquired by the big dominant players from previous decades — think of Slack being bought by Salesforce, GitHub by Microsoft, Instagram and WhatsApp by Facebook, and so on. After Facebook/Meta and Tesla, the new tech boom didn’t produce any truly giant public companies — none that crack the top 100. (Stripe and SpaceX have a good shot at becoming giants, I think, but they’re still private.)
Meanwhile, the dominance of the big companies during this boom was absolutely astonishing. By mid-2021, just five tech stocks — Apple, Microsoft, Google, Amazon, and Facebook/Meta — represented a whopping 23% of the entire S&P 500 index. The entire venture capital industry has about $2 trillion in assets under management; that’s about equal to the market cap of just one big tech company, Apple.
Nor was this dominance due to massive overvaluation; except for Amazon, most of these companies went through the boom period with PE ratios of 25-30, which is not that high. Startups are promises of future profits; in the 2010s, Big Tech made unbelievably huge amounts of actual profits. For all the talk of disruption, not even one of the companies that started the 2010s in a dominant market position was successfully disrupted by a new entrant. (Facebook’s modest loss of market share to TikTok is the perhaps the closest example.)
Why were the big companies so dominant during over the last decade? Part of it is surely do to a series of spectacular corporate turnarounds — Apple’s invention of the smartphone and the app ecosystem, Amazon and Microsoft’s pivot to cloud computing. But part of it, I think, is that the 2010s boom was fundamentally about the scaling of the internet.
The smartphone represented a way to get far more people online — and online for far more hours of the day — than the PC and broadband had done. Depending on where you lived, it either completed or accelerated the trend of the 90s and 00s — getting everyone online.
At the same time, a parallel process was playing out in the business world; businesses that had built websites in the 2000s built apps in the 2010s.
Big Tech made the most money from this process because they owned the platforms that undergirded the whole thing. Social media and the gig economy surely represented new ways for people to use the internet, but ultimately the profits went to the companies who enabled the scaling that drove all the underlying trends — the purveyors of cloud computing, smartphones, operating systems, and the other basic infrastructure of the internet. The startups of the 2010s mostly just built stuff on top of that. Meta found out over the past year, in a very painful way, that much of the value of its social media platforms could ultimately be appropriated by Apple’s underlying control of the operating system and app store platforms.
But it wasn’t just the valuations or the earnings that truly made Big Tech the most important player in the ecosystem; it was the salaries. Startups are able to lure hungry, talented workers with the promise of a possible spectacular payday somewhere down the line; big tech companies countered this by offering those workers a hefty definite payday in the here and now. I posted this chart of Google and Facebook engineer salaries compared to the median income a year ago, and people in the industry already know these numbers, but it still astonishes me:
An entry-level FAANG engineer, right out of college, made five times the median personal income in the United States. In just a few years, with two promotions, they could easily be making ten times the median personal income. And of course managers and higher-level engineers got paid far more. Of all industries in the U.S., perhaps only the quant finance firms could compete with that kind of money.
Startups certainly couldn’t. Sure, if you were a 23-year-old hotshot engineer who pulled all-nighters and preferred a shot at glory to a guaranteed ticket to the upper class, you might sign on with a scrappy little startup for a lot of highly speculative equity and just a little cash. But if you were a 38-year-old top-level engineering manager with a mortgage and two kids, it would be hard to turn down that FAANG salary. And even medium-big companies were forced to shell out big bucks to keep pace with the top players; recall that the “N” in “FAANG” stands for Netflix, a company that never really had the ability to be one of the country’s largest, but which was famous for paying high salaries.
Big Tech compensation was thus both a cause and a consequence of Big Tech market dominance. A consequence, because those enormous valuations allowed the companies to pay huge dollar amounts without diluting their shareholders much; a cause, because those dollar amounts let the companies hoard top talent and muscle out or acquire upstart competitors. For all the talk of disruption and the venture boom, the 2010s were a master class in how big established companies could stay on top of a fast-changing industry.
A winnowing, but hardly a collapse
In fact, I don’t expect the crash in tech stocks to put an end to any of the basic dynamics I described above. Big Tech stocks have gone down, but medium-big tech stocks have gone down more, and later-stage startups are now starved for capital. The big companies still own most of the basic platforms of the internet — cloud, smartphones, operating systems, app stores — and Google and Microsoft (through its partnership with OpenAI) are leading in the hottest new technological space as well.
What has happened, though, is that the internet as a whole is slowly turning into a mature business. Adoption has pretty much saturated, except in a few poorer regions of the globe. Every business is now fully online and every consumer is online all day long. Cloud computing is still growing steadily, but not at as torrid a pace as before. Just like railroads and electricity and phone networks, the internet can only wire the world together once. Once you take most of a winner-take-most market, what else is there to take? And because Moore’s Law is slowing down, the tech companies’ ability to offer products with ever higher performance will likely slow down as well.
I certainly don’t expect Big Tech will disappear, or even fall out of its dominant position at the top of the U.S. corporate hierarchy. The Big Four (Apple, Microsoft, Google, and Amazon) are still the four most valuable companies in the nation. And even though Moore’s Law is slowing, big tech may experience another burst of product innovation and growth from AI.
Nor do I expect these layoffs to be of much consequence to the economy as a whole. Even as highly paid engineers and managers are losing their jobs, employment rates in the U.S. at large are near record highs. In fact, even in the Bay Area, the layoffs that are causing such dismay among tech workers are an exception to the prevailing healthy economic trends:
In other words, Big Tech is having a tiny little mini-recession but no one else is joining in yet.
Still, I do think the layoffs mark an important turning point in the industry, for several reasons.
First, salaries for engineers and managers could get cut a lot. In most industries, it’s very difficult to actually cut pay, but in the tech world it’s actually pretty easy, especially for higher-level employees. At the upper levels, Big Tech compensation packages don’t really come in predictable annual amounts; instead, they tend to be very lumpy, coming in a series of “refreshers” and signing bonuses. Employees will threaten to jump ship to a competitor, and their bosses will hurl large amounts of stock at their head in order to persuade them to stay. Or they’ll actually jump ship and get a big lump of equity as a signing bonus. It’s a seller’s market for skilled labor.
Or at least, it was. Now, with practically everyone doing layoffs or hiring freezes, FAANG employees will be much less likely to jump ship. This means that there will be far reason to give them refreshers, and they won’t get many signing bonuses. All you have to do in order to massively cut pay at a big tech company is to stop giving out discretionary equity grants.
The other change from the layoffs, I think, will be a change in the psychology of working for Big Tech. When all companies did was expand and hire, it was easy for employees not to think about the possibility of a layoff. That probably increased company loyalty. And it was easy for engineers and managers throughout the tech ecosystem to think of a lucrative, comfy job at Google or Facebook as a perpetual outside option; Big Tech was always hiring, always out there waiting for you.
Now all that is probably gone. Employees now realize that Google and Amazon and the rest are just standard pieces of corporate America — transactional entities that will cast you aside when you don’t produce enough shareholder value.
That’s no knock against the Big Tech companies; the business world will always be a harsh one, and no corporation is running a charity. But they will pay an inevitable cost for these layoffs in terms of morale among the vast majority of employees who didn’t get the sack — and in terms of mindshare among the even vaster number of tech workers who don’t work at these companies.
So I think the main result of these layoffs is just that a lot of workers in the tech industry are going to start thinking about where else they might possibly work.
A more fragmented, equitable, and confusing job market
The most difficult thing about modern labor markets is that no one really knows what kind of job to get. In the 1720s or the 1820s, most people basically knew they were going to be a farmer or take over a family trade. In the 1920s, a blue-collar entry-level worker could know that there was a good chance he was going to get a factory job. But in the 2020s, our economy has generated a dizzyingly kaleidoscopic range of employment options. Job descriptions and required skills vary enormously from company to company and role to role, thanks to task specialization and corporate differentiation. Careers ramify stochastically through the space of possibilities, and no one really knows where they’re going to end up. Seven or eight years ago, how could I have known that in 2023 I’d be writing a Substack newsletter for a living? Substack didn’t even exist!
The seemingly infinite dependability of Big Tech created an oasis of predictability for many tech workers, offering a clear and simple lifetime career path that lots of people knew they could count on. But in the world after the big layoffs, tech workers must once again confront the terrifying uncertainty of modern job markets. Once again they will have to cultivate their “weak ties”, as the economic sociologist Mark Granovetter calls the networking relationships that give people ideas and opportunities for new jobs. Once again their will have to keep their resumes polished and up to date.
That is a scary prospect. But in terms of the effect on the larger industrial ecosystem of the United States, it could be a boon. There are many important technological tasks in the U.S. other than building a bigger, better internet.
For example, lots of non-software businesses have tons of software requirements. Bloomberg’s Gabrielle Coppola recently wrote about the many other industries that could stand to benefit from even a small a tech worker exodus:
For automakers trying to remake cars for the digital age, the demand for software skill is only increasing…There’s potential opportunity in the tech industry’s cutbacks….The wave of laid-off tech workers could prove to be an opportunity for automakers. That said, they’re hardly the only suitor looking to woo tech workers in need of employment. Demand for entry-level software engineers has surged in sectors like government, up 36% in Dec. 2022, compared to Jan. 2021, and construction, up 28% over the same period, according to data from Handshake, a job site that connects students and recent graduates with employers. Federal agencies such as the US Department of Veterans Affairs see this moment as a chance to snag talent that they’ve struggled to attract for years.
Coppola doesn’t mention it, but defense contractors, especially miltech startups, are another industry that could benefit from an influx of talent as Cold War 2 ramps up.
No, the salaries in these other industries won’t be as high as they were for Big Tech. But that blow will be partly cushioned by the much lower costs of living outside San Francisco and Seattle.
And tech workers living outside of San Francisco and Seattle is arguably just what this country needs. Dispersing economic activity to the Midwest and other less dynamic regions will help reduce the regional inequality that defined the last three decades. And higher concentration of tech workers outside traditional venture capital hubs would likely accelerate the diffusion of venture investment as well.
Less monopolization of tech talent by a few big companies will also probably be good for competition in the tech ecosystem. More workers will go to startups, or even start their own companies. Pay will generally be lower, except for the lucky few who strike it rich. But the result will be a more dynamic U.S. economy; job growth in this country depends on growing more small companies into big ones. We shouldn’t want our corporate landscape to fall into the kind of comfortable stasis experienced in much of Europe and Japan.
In other words, although I feel bad for any worker who gets laid off, and I’m worried for my many friends who work for companies like Google, I can’t help but be a little optimistic about what this winnowing of Big Tech heralds for the future. The dominance that these companies managed to exert during the years of the Second Tech Boom was truly an impressive feat, and lots of people benefitted from the products and infrastructure they created. But it’s time for another, different tech boom to begin.
My understanding is that all of these major tech companies still have more employees after the layoffs than they did before the pandemic. Therefore, to me, this just looks like a correction after a massive hiring binge during the pandemic when tech usage soared. A lot of companies wanted to seize the opportunity to offer more services, and they hired aggressively to do so.
There was also a hope that the changes in consumer and business behavior during the pandemic would lead to a permanent structural change in the economy. For example, consumers would continue to use online shopping at a much higher rate than pre-pandemic. Similarly, remote work would stick and businesses would need substantially more digital collaboration tools like Slack and Zoom.
This hope was dashed as tech usage normalized a fair bit in 2022. At most it appears that the pandemic pulled forward some growth. Eg, streaming usage exploded initially but is now growing slower than pre-pandemic such that it appears to be reverting to the projected trajectory of 2019.
Tech companies are recognizing the reality of tech usage and adjusting their business plans and staffing accordingly. Yet the economic impact and employee count of these firms still exceed pre-pandemic levels.
Hi Noah,
In your recent Google survey you asked some questions about what your subscribers wanted to see more of and what areas interest them more than others. This posting is an example of what I like reading about. I’m an old man now and not ever returning to the work force. Nobody wants to employ old ailing en who have deaf issues, and like to nap. But, I’m interested in the marketplace, and learning about these things is just plain fun. Thanks for researching and writing about these industries and how they affect our lives.